The Accidental Philanthropist® – Mark Halpern

 

How the Intersection of Tax, Life Insurance and Charity Helped a Family Achieve Its Philanthropic Goals

 

By Mark Halpern, CFP, TEP, MFA-P

After 33 of professional practice, I am convinced that most business is extremely personal because people prefer to do business with those who have relationships with them.

When looking to make a big-ticket purchase they often choose the retail outlet where they know and trust the manager even if it costs a little bit more. When considering a substantial charitable donation, they usually seek an organization where they have a personal connection – either to someone who works there or to someone who benefited from the charity’s services. And if they don’t have an existing relationship to turn to, they’ll often ask around for a personal referral.

On the surface, it may look like technology has changed how we go about our daily lives so much that prioritizing relationships doesn’t apply anymore. Without question, the internet has made many interactions for business and pleasure a lot less personal. And it’s true that people sometimes buy expensive things online, clicking through to checkout without talking to a knowledgeable salesperson. They also donate online, typing in their credit card number without much thought and certainly without any strategic planning that could maximize the benefits for themselves and for the charity. (Using cash, checks and credit cards is the least cost-effective and tax-efficient way to be generous. Contact us for to receive our white paper).

Nevertheless, both businesses and not-for-profits that emphasize relationships over transactions, and put strategic planning ahead of snap decisions, still have a tremendous opportunity to stand out and attract clients and donors. A solid first step in relationship-building is to demonstrate how you can help someone save money – and that can be just as impactful whether you’re selling a product or sharing a tax-minimizing donation strategy.

We meet with so many successful entrepreneurs and affluent families who are more than happy to share their wealth when asked to donate through a one-time gift – say, on behalf of a friend who is running a half-marathon to support cancer research. But when we ask them questions about their estate plan, we discover that they often don’t have an up-to-date will, powers of attorney, a shareholders’ agreement or an estate directory. You’d expect the high-net-worth to have this type of strategic planning in order – but they usually don’t.

Planning more important than ever

Since Budget 2024 increased the capital gains inclusion rate, tax planning through philanthropy has become even more valuable. Since June 25, 2024, individuals are taxed on two-thirds of capital gains above $250,000 that they realize during a year (they continue to be taxed on one-half of capital gains below that threshold). Meanwhile, corporations are now taxed on two-thirds of all capital gains they realize during the year.

Even before this change, but especially after it, successful entrepreneurs and affluent families must decide whether they want the government to be one of their largest beneficiaries – or whether they would prefer to implement strategies that maximize their legacy to loved ones while also supporting their favourite philanthropic causes. Would they prefer to be remembered for giving $5 million to Ottawa or $10 million to charity? It is possible to convert taxes into charity, but you need a plan to do it.

Proper planning is customized to each family’s needs, but here’s a simple example of how it can work.

A Recent Case

A charitable family owned a holding company with an investment portfolio that included $2 million of appreciated stock, initially costing $1 million. They wanted to make a charitable contribution while prioritizing their family’s financial wellbeing.

The Give and Get Strategy

Selling the securities would trigger a $1 million capital gain, resulting in $360,000 owed in taxes. Within 24 hours, we established a Donor Advised Fund (DAF) with a community foundation at no cost to the family. They donated the entire $2 million in appreciated securities to the DAF, completely mitigating the $360,000 capital gains tax.

The shares were sold at the market rate, generating a charitable receipt for $2 million. This receipt could offset up to 75% of their net taxable income, saving them $1 million in taxes which they could use now or over five years, which would also allow the triggering of any other capital gains tax from other assets.

Additionally, the $1 million gain from the donation created a Capital Dividend Account (CDA) credit, enabling the family to withdraw that amount tax-free from their company, saving a further $470,000 of tax.

We then utilized $1 million of the DAF to purchase a ONE PAY My Par Gift™ policy from Canada Life, designed for charitable giving, ensuring a large legacy gift and access to cash value and dividends during their lifetime. The policy, valued at $3.4 million at life expectancy, allowed them to leverage their legacy even further for their children and grandchildren.

Wrapping It All Up

How did we make the family entirely “whole” after their donation to charity?  The charitable donation was effectively replaced with a $2 million joint last-to-die policy owned by their corporation, with premiums paid by the corporation over 10 years, totaling $400,000. The policy’s death benefit would be paid tax-free to the corporation, flowing out of the CDA.

  • $2 million goes to the children
  • $3.4 million of death benefit on the policy owed by the DAF (this in addition to the $1m that we kept there)
  • $1.8 million in tax savings

A lot of our work is about moving the financial furniture around to achieve a family’s objectives. The result is that families – who often have no idea this type of planning is possible – get to be remembered for all the right reasons. They leave their money to loved ones. They finance important work done by charities. And they do all of this while making sure the government isn’t their biggest beneficiary.

Strategic Philanthropy like this is very different from an approach that focuses on transactions. We build strong relationships with clients by helping them design an optimized legacy. Often, our planning includes philanthropy as a way to turn transform success into significance while saving tax. To achieve this, we draw on all the available tools and arrange them in the best possible configuration. It’s business, but it’s also very personal – and it serves the best interests of our clients and their charitable causes.

Please do not hesitate to contact us for a no-obligation conversation. Introduce us to your situation and allow us to share estate planning, tax minimization and philanthropy strategies to help you achieve your unique objectives.

Mark Halpern is a well-known CFP, TEP, MFA-P and Certified Financial Planner, Trust & Estate Practitioner and Master Financial Advisor—Philanthropy. He writes this column exclusively for each issue of Foundation Magazine.

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